ICAI Notes: Ethics and Terms of Audit Engagements | Auditing and Ethics for CA Intermediate PDF Download

 Page 1


a
    
 
CHAPTER 
11 
 
LEARNING OUTCOMES 
 
  
ETHICS AND TERMS 
OF AUDIT 
ENGAGEMENTS 
 
 
 
After studying this chapter, you would be able to understand- 
? Meaning of “Ethics” 
? Need for Professional Ethics 
? Fundamental Principles of Professional Ethics 
? Independence of Auditors 
? Threats to Independence 
? Safeguards to Independence 
? Professional Skepticism 
? SA 210 Agreeing the Terms of Audit Engagement 
? About Preconditions for an Audit 
? Basic overview of SQC 1 
? Basic overview of SA 220 
? Practicality of above concepts using examples and case studies.  
© The Institute of Chartered Accountants of India
Page 2


a
    
 
CHAPTER 
11 
 
LEARNING OUTCOMES 
 
  
ETHICS AND TERMS 
OF AUDIT 
ENGAGEMENTS 
 
 
 
After studying this chapter, you would be able to understand- 
? Meaning of “Ethics” 
? Need for Professional Ethics 
? Fundamental Principles of Professional Ethics 
? Independence of Auditors 
? Threats to Independence 
? Safeguards to Independence 
? Professional Skepticism 
? SA 210 Agreeing the Terms of Audit Engagement 
? About Preconditions for an Audit 
? Basic overview of SQC 1 
? Basic overview of SA 220 
? Practicality of above concepts using examples and case studies.  
© The Institute of Chartered Accountants of India
a
 
 
 
AUDITING AND ETHICS  
 
11.2 
 
 
 
 
 
 
 
 
Independence 
of MIND
Independence 
in 
APPEARANCE
AUDITOR'S  
INDEPENDENCE
Self-
Review 
Threats
Self-
Interest 
Threats Threats Threats
Threats
To 
Independence
Advocacy 
Threats
Familiarity 
Threats
Intimidation 
Threats
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
Page 3


a
    
 
CHAPTER 
11 
 
LEARNING OUTCOMES 
 
  
ETHICS AND TERMS 
OF AUDIT 
ENGAGEMENTS 
 
 
 
After studying this chapter, you would be able to understand- 
? Meaning of “Ethics” 
? Need for Professional Ethics 
? Fundamental Principles of Professional Ethics 
? Independence of Auditors 
? Threats to Independence 
? Safeguards to Independence 
? Professional Skepticism 
? SA 210 Agreeing the Terms of Audit Engagement 
? About Preconditions for an Audit 
? Basic overview of SQC 1 
? Basic overview of SA 220 
? Practicality of above concepts using examples and case studies.  
© The Institute of Chartered Accountants of India
a
 
 
 
AUDITING AND ETHICS  
 
11.2 
 
 
 
 
 
 
 
 
Independence 
of MIND
Independence 
in 
APPEARANCE
AUDITOR'S  
INDEPENDENCE
Self-
Review 
Threats
Self-
Interest 
Threats Threats Threats
Threats
To 
Independence
Advocacy 
Threats
Familiarity 
Threats
Intimidation 
Threats
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
ETHICS AND TERMS OF AUDIT ENGAGEMENTS 
a
 
 
11.3 
Human civilization is built upon ethics. We cannot think of our daily lives without 
ethics.  Think of any endeavour of human activity- be it imparting of education, 
running a business, engaging in a profession or carrying out public administration 
affairs- ethics have a role to play in every field. Ethics guide us and help in building 
trust. 
Consider the case of business. Can a company which does not take care of its 
workforce or hear its customers achieve heights in its respective trade? A business 
which dishes out substandard products instead of promised ones would not be 
able to stay in market for too long. Or take the case of a lawyer who fails to attend 
legal proceedings of a client without reasonable cause putting his client’s interests 
in jeopardy. Is his conduct ethical? Ultimately, such unprofessional behaviour would 
tarnish his reputation and credibility. 
Sameer was trying to understand importance of ethics in profession of Chartered 
Accountancy. He was wondering whether a code of ethics exists for Chartered 
accountants and if so, how exhaustive it would be. Based upon his understanding 
of auditing till now, he was certain that an auditor must comply with ethical 
requirements while conducting audit of financial statements. He knew that auditor 
should be a person of unimpeachable integrity. He gives opinion on financial 
statements of entities and to maintain sanctity and credibility of his signatures, it is 
necessary that an auditor should comply with ethics.  
A parallel stream of thoughts was also gaining momentum in his mind. Should an 
auditor follow only those requirements which have been clearly laid down in the 
rule book? What about situations for which little has been laid down? Thinking 
about “independence” of auditors, he seemed pretty sure that it was not possible 
to codify every situation affecting independence of auditor. What approach should 
auditor follow so that users continue to repose faith? Is there more than one 
perspective of concept of “independence”? And most importantly, how should an 
auditor proceed in a situation where he finds his “independence” on a sticky wicket 
due to extraneous factors? 
Performing professional work following ethics also leads to qualitative audits 
conforming to professional standards. Are there any pronouncements on quality 
control to be followed by Chartered Accountants? He was yearning to learn about 
these. 
© The Institute of Chartered Accountants of India
Page 4


a
    
 
CHAPTER 
11 
 
LEARNING OUTCOMES 
 
  
ETHICS AND TERMS 
OF AUDIT 
ENGAGEMENTS 
 
 
 
After studying this chapter, you would be able to understand- 
? Meaning of “Ethics” 
? Need for Professional Ethics 
? Fundamental Principles of Professional Ethics 
? Independence of Auditors 
? Threats to Independence 
? Safeguards to Independence 
? Professional Skepticism 
? SA 210 Agreeing the Terms of Audit Engagement 
? About Preconditions for an Audit 
? Basic overview of SQC 1 
? Basic overview of SA 220 
? Practicality of above concepts using examples and case studies.  
© The Institute of Chartered Accountants of India
a
 
 
 
AUDITING AND ETHICS  
 
11.2 
 
 
 
 
 
 
 
 
Independence 
of MIND
Independence 
in 
APPEARANCE
AUDITOR'S  
INDEPENDENCE
Self-
Review 
Threats
Self-
Interest 
Threats Threats Threats
Threats
To 
Independence
Advocacy 
Threats
Familiarity 
Threats
Intimidation 
Threats
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
ETHICS AND TERMS OF AUDIT ENGAGEMENTS 
a
 
 
11.3 
Human civilization is built upon ethics. We cannot think of our daily lives without 
ethics.  Think of any endeavour of human activity- be it imparting of education, 
running a business, engaging in a profession or carrying out public administration 
affairs- ethics have a role to play in every field. Ethics guide us and help in building 
trust. 
Consider the case of business. Can a company which does not take care of its 
workforce or hear its customers achieve heights in its respective trade? A business 
which dishes out substandard products instead of promised ones would not be 
able to stay in market for too long. Or take the case of a lawyer who fails to attend 
legal proceedings of a client without reasonable cause putting his client’s interests 
in jeopardy. Is his conduct ethical? Ultimately, such unprofessional behaviour would 
tarnish his reputation and credibility. 
Sameer was trying to understand importance of ethics in profession of Chartered 
Accountancy. He was wondering whether a code of ethics exists for Chartered 
accountants and if so, how exhaustive it would be. Based upon his understanding 
of auditing till now, he was certain that an auditor must comply with ethical 
requirements while conducting audit of financial statements. He knew that auditor 
should be a person of unimpeachable integrity. He gives opinion on financial 
statements of entities and to maintain sanctity and credibility of his signatures, it is 
necessary that an auditor should comply with ethics.  
A parallel stream of thoughts was also gaining momentum in his mind. Should an 
auditor follow only those requirements which have been clearly laid down in the 
rule book? What about situations for which little has been laid down? Thinking 
about “independence” of auditors, he seemed pretty sure that it was not possible 
to codify every situation affecting independence of auditor. What approach should 
auditor follow so that users continue to repose faith? Is there more than one 
perspective of concept of “independence”? And most importantly, how should an 
auditor proceed in a situation where he finds his “independence” on a sticky wicket 
due to extraneous factors? 
Performing professional work following ethics also leads to qualitative audits 
conforming to professional standards. Are there any pronouncements on quality 
control to be followed by Chartered Accountants? He was yearning to learn about 
these. 
© The Institute of Chartered Accountants of India
a
 
 
 
AUDITING AND ETHICS  
 
11.4 
1. MEANING OF ETHICS – A STATE OF MIND 
The term “Ethics” means moral principles which govern a person’s behaviour or his 
conducting of an activity. It is the branch of knowledge that deals with moral 
principles. Ethics is something which comes from an individual intrinsically. It has 
to be inculcated in the habit and temperament of an individual, so that there is an 
overall culture of ethics; the force has to be strong enough to withstand any selfish 
motive or temptation. It is a state of mind to act and perform in accordance with 
moral principles. Ethics is the science of morals in human conduct.  Such moral 
principles and rules of conduct impose obligations upon individuals. 
2. NEED FOR PROFESSIONAL ETHICS 
Professions like law, medicine have their code of ethics. Auditing profession is no 
exception. Rather, in the profession of auditing, requirement of ethics is manifold. 
It is due to the reason that society in general, governments, clients, taxing 
authorities, employees, investors, the business and financial community in 
particular, have reposed tremendous trust in services rendered by Chartered 
Accountants. 
The purpose of assurance engagements is to enhance confidence of the intended 
users. Therefore, users need to trust the person who is providing such services. 
Professional ethics are based on morality. Human nature being what it is, a man, 
often, places his personal gain above service. Therefore, persons who as individuals 
and as a class, are willing to place public good above their personal gain have 
enjoyed respect and honour. But such a relationship can be maintained or 
enhanced only if the professional body to which they belong would interpret the 
concept of public interest as broadly as possible. The respect and confidence 
enjoyed by a profession, to a great extent, is dependent on the strictness and 
scrupulousness with which such ethics are adhered to by self-discipline.  
A distinguishing feature of the accountancy profession is its acceptance of the 
responsibility to act in the public interest. Professional ethics seek to protect the 
interests of the profession as a whole and act as a shield that enables us to 
command respect. 
A Chartered Accountant, either in practice or in service, has to abide by ethical 
behaviours. They are expected to follow the fundamental principles of professional 
© The Institute of Chartered Accountants of India
Page 5


a
    
 
CHAPTER 
11 
 
LEARNING OUTCOMES 
 
  
ETHICS AND TERMS 
OF AUDIT 
ENGAGEMENTS 
 
 
 
After studying this chapter, you would be able to understand- 
? Meaning of “Ethics” 
? Need for Professional Ethics 
? Fundamental Principles of Professional Ethics 
? Independence of Auditors 
? Threats to Independence 
? Safeguards to Independence 
? Professional Skepticism 
? SA 210 Agreeing the Terms of Audit Engagement 
? About Preconditions for an Audit 
? Basic overview of SQC 1 
? Basic overview of SA 220 
? Practicality of above concepts using examples and case studies.  
© The Institute of Chartered Accountants of India
a
 
 
 
AUDITING AND ETHICS  
 
11.2 
 
 
 
 
 
 
 
 
Independence 
of MIND
Independence 
in 
APPEARANCE
AUDITOR'S  
INDEPENDENCE
Self-
Review 
Threats
Self-
Interest 
Threats Threats Threats
Threats
To 
Independence
Advocacy 
Threats
Familiarity 
Threats
Intimidation 
Threats
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
ETHICS AND TERMS OF AUDIT ENGAGEMENTS 
a
 
 
11.3 
Human civilization is built upon ethics. We cannot think of our daily lives without 
ethics.  Think of any endeavour of human activity- be it imparting of education, 
running a business, engaging in a profession or carrying out public administration 
affairs- ethics have a role to play in every field. Ethics guide us and help in building 
trust. 
Consider the case of business. Can a company which does not take care of its 
workforce or hear its customers achieve heights in its respective trade? A business 
which dishes out substandard products instead of promised ones would not be 
able to stay in market for too long. Or take the case of a lawyer who fails to attend 
legal proceedings of a client without reasonable cause putting his client’s interests 
in jeopardy. Is his conduct ethical? Ultimately, such unprofessional behaviour would 
tarnish his reputation and credibility. 
Sameer was trying to understand importance of ethics in profession of Chartered 
Accountancy. He was wondering whether a code of ethics exists for Chartered 
accountants and if so, how exhaustive it would be. Based upon his understanding 
of auditing till now, he was certain that an auditor must comply with ethical 
requirements while conducting audit of financial statements. He knew that auditor 
should be a person of unimpeachable integrity. He gives opinion on financial 
statements of entities and to maintain sanctity and credibility of his signatures, it is 
necessary that an auditor should comply with ethics.  
A parallel stream of thoughts was also gaining momentum in his mind. Should an 
auditor follow only those requirements which have been clearly laid down in the 
rule book? What about situations for which little has been laid down? Thinking 
about “independence” of auditors, he seemed pretty sure that it was not possible 
to codify every situation affecting independence of auditor. What approach should 
auditor follow so that users continue to repose faith? Is there more than one 
perspective of concept of “independence”? And most importantly, how should an 
auditor proceed in a situation where he finds his “independence” on a sticky wicket 
due to extraneous factors? 
Performing professional work following ethics also leads to qualitative audits 
conforming to professional standards. Are there any pronouncements on quality 
control to be followed by Chartered Accountants? He was yearning to learn about 
these. 
© The Institute of Chartered Accountants of India
a
 
 
 
AUDITING AND ETHICS  
 
11.4 
1. MEANING OF ETHICS – A STATE OF MIND 
The term “Ethics” means moral principles which govern a person’s behaviour or his 
conducting of an activity. It is the branch of knowledge that deals with moral 
principles. Ethics is something which comes from an individual intrinsically. It has 
to be inculcated in the habit and temperament of an individual, so that there is an 
overall culture of ethics; the force has to be strong enough to withstand any selfish 
motive or temptation. It is a state of mind to act and perform in accordance with 
moral principles. Ethics is the science of morals in human conduct.  Such moral 
principles and rules of conduct impose obligations upon individuals. 
2. NEED FOR PROFESSIONAL ETHICS 
Professions like law, medicine have their code of ethics. Auditing profession is no 
exception. Rather, in the profession of auditing, requirement of ethics is manifold. 
It is due to the reason that society in general, governments, clients, taxing 
authorities, employees, investors, the business and financial community in 
particular, have reposed tremendous trust in services rendered by Chartered 
Accountants. 
The purpose of assurance engagements is to enhance confidence of the intended 
users. Therefore, users need to trust the person who is providing such services. 
Professional ethics are based on morality. Human nature being what it is, a man, 
often, places his personal gain above service. Therefore, persons who as individuals 
and as a class, are willing to place public good above their personal gain have 
enjoyed respect and honour. But such a relationship can be maintained or 
enhanced only if the professional body to which they belong would interpret the 
concept of public interest as broadly as possible. The respect and confidence 
enjoyed by a profession, to a great extent, is dependent on the strictness and 
scrupulousness with which such ethics are adhered to by self-discipline.  
A distinguishing feature of the accountancy profession is its acceptance of the 
responsibility to act in the public interest. Professional ethics seek to protect the 
interests of the profession as a whole and act as a shield that enables us to 
command respect. 
A Chartered Accountant, either in practice or in service, has to abide by ethical 
behaviours. They are expected to follow the fundamental principles of professional 
© The Institute of Chartered Accountants of India
 
 
ETHICS AND TERMS OF AUDIT ENGAGEMENTS 
a
 
 
11.5 
ethics while performing their duties. Service users of professionals should be able 
to feel secure that there exists a framework of professional ethics which governs 
the provision of those services.  
It is in this spirit of things that the Institute of Chartered Accountants of India (ICAI) 
requires its members to comply with the principles of ethics while performing their 
duties. The ethics for Chartered Accountants have, therefore, been codified as 
ethical compliance has always been a philosophy of the profession. Chartered 
accountants, whether in practice or in service, are required to comply with the 
provisions of Code of Ethics. 
Any deviation from the ethical responsibilities brings the disciplinary mechanism 
into action against the Chartered Accountants which may result into fines, 
suspension of membership, removal from membership or other disciplinary actions. 
3. PRINCIPLES BASED APPROACH VS RULES  
BASED APPROACH TO ETHICS (ETHICAL OR 
LEGAL) 
Ethical guidance may follow principles-based approach or rules-based approach. 
The essence of principles-based approach to ethics is that it requires compliance 
with spirit of ethics. It requires accountants to exercise professional judgment in 
every situation based upon their professional knowledge, skill and expertise. It 
requires that accountants should use professional judgment to evaluate every 
situation to arrive at conclusions. 
However, rules-based approach to ethics strictly follows clearly established rules. It 
may lead to a narrow outlook and spirit of ethics may be overlooked while strictly 
adhering to rules. Further, rules- based approach is somewhat rigid as it may not 
be possible to deal with every practical situation relying upon rules. 
Therefore, it is necessary that spirit of code is followed. 
4. FUNDAMENTAL PRINCIPLES OF PROFESSIONAL  
 ETHICS 
The fundamental principles of ethics establish the standard of behaviour expected 
© The Institute of Chartered Accountants of India